Making every cent count

Andrew Sims, CEO at NEC Payments, discusses Middle East payment trends of 2017

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Making every cent count Andrew Sims, CEO, NEC Payments.
By  Andrew Sims Published  February 12, 2017

2016 was an interesting and challenging year for the Middle East payments industry, as it was for the region as a whole, brought about by many local and international factors and influences.

The year started positively after Warburg Pincus and General Atlantic purchased a 49% stake in UAE-based Network International, the region’s largest payments processor from The Abraaj Group in late 2015. The investment empowered Network International to go in the acquisition trail purchasing Jordan’s Emerging Market Payments in March 2016 for a reported $340m. Industry sources suggest that this may not be the last M&A activity by Network International and that other targets may be on the shopping list for 2017.

Early 2016 also saw the roll-out of an immediate payment network in Bahrain; the Electronic Funds Transfer System or ETFS is operated by The Benefit Company on behalf of Central Bank of Bahrain. EFTS provides Bahrain consumers and businesses with the ability to instantly transfer funds between bank accounts and to settle bill payments using an Electronic Bill Payment and Presentment (EBPP) system. This highly advanced domestic payment system puts Bahrain ahead of many of its regional and international counterparts and has been embraced by the market with a surge in transaction volumes.

The UAE also saw high-profile new consumer product launches during the year. In May, Beam — an app-based mobile wallet that uses contactless technology for retail purchases and that is supported by MasterCard — was launched; and later during the year in November, a multi-currency prepaid travel money offering GlobalCash Card was launched by Emirates NBD.

In October at GITEX 2016 Microsoft and NEC Payments announced the culmination of a development and infrastructure project to deploy NEC Payments MasterCard certified and PCI-DSS compliant payment processing technologies in the Microsoft Azure cloud. This ground-breaking deployment marked the first time that highly-secure core transaction processing had been hosted in a public cloud environment, and is the first phase of a structure product development and go-to-market initiative by the two companies.

Economic fragility and uncertain market conditions could make the start to 2017 an unpredictable period, and this may be further affected by the dramatic recent changes in the political situation in the US that will solidify in January after the President elect takes office. There are already significant issues faced by segments of the financial services industry in the region, particularly foreign currency liquidity and the ability to effectively and reliably make settlement payments in US Dollars, and it remains to be seen whether this situation will improve or deteriorate further.

The high percentage of cash usage in regional markets will continue to hold back financial inclusion and financial literacy rates, especially amongst low-earners and migrant workers, which in turn has a negative effect on social and economic development. Public initiatives to reduce cash in the economy —  such as that promoted by SAMA in Kingdom of Saudi Arabia — are a welcome and positive sign, as are technical advancements that are facilitating broader distribution and acceptance channel for electronic payments.

However, the rate of advancement is being slowed by regulatory controls that are restricting the development and take-up of innovative financial products being brought to the market by the new breed of Financial Technology companies, or FinTech’s as they are known. The pace at which Regulators can respond by implementing new licensing, regulatory and compliance frameworks for FinTech’s and the products they develop will be a critical factor in the medium-term success of these financial inclusion and cash displacement initiatives.

Cash displacement, financial inclusion and the rate of migration towards electronic payments will continue to be the major factor affecting the Middle East payments industry throughout 2017. The overriding market opportunity in the region for issuers, merchant service providers, and FinTechs is to target these cash-based flows with new digital products and services rather than competing over market share in the already well serviced middle and affluent demographic tiers.

A clear and growing international trend which could dramatically affect the speed of cash displacement in Middle East is the move towards release of open APIs by banks, domestic switches and payment networks. If regional networks - such as Bahrain’s new EFTS — were to promote such initiatives, it would enable new payment products using mobile and internet channels to open-up low-value person-to-person P2P and retail transactions across these networks; reducing friction and cost in these majority-cash-based scenarios.

Technology advancements in retail management systems such as cloud-based POS solutions and the continued growth in mobile POS (MPOS) acceptance will help to drive electronic payments acceptance for lower value transactions in convenience stores, small retailers, delivery services and transportation.

At the higher-end of the retail industry we expect that a move toward omni-channel retail and payment systems will enable merchants to gather added-value through increased efficiency, business information, and consolidation of payment flows; and from the support for new social, mobile and online sales, marketing and distribution channels. The current strong growth trend in e-commerce and m-commerce amongst millennials and new consumers is expected to increase exponentially in line with the advent and promotion of these new channels.

Industry experts remain bullish about the medium to long term future for the payments industry in Middle East. CapGemini analysts indicates that the number of non-cash payments in the region is growing at an annual rate of 12.3% versus global growth of only 8.9%.

This analysis is borne out by separate research by McKinsey which suggests that the payments industry will see revenue growth of over 7% per annum through to 2019. Boston Consulting Group are even more confident in their outlook, forecasting that revenues generated from payments in the Middle East North Africa (MENA) region will reach $85bn by 2023 – a compound annual growth rate of more than 12%.
These types of positive forecasts enable the short term economic and regulatory challenges to be put into context: whilst the immediate future may be somewhat uncertain the long-term opportunity for the payments industry in the region remains very compelling indeed.

Andrew Sims, CEO, NEC Payments B.S.C(c)

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